Positive outlook for reporting season

The upcoming confession period before the August reporting season is expected to be pretty guilt-free thanks to a notable improvement in the operating environment across almost all sectors.

This puts the focus on companies forecast to post sharply higher earnings for the year.

Small-cap investors will have a decent selection to choose from as data compiled on Bloomberg shows close to 60 per cent of smaller companies covered by mainstream brokers are predicted to deliver a growth in earnings per share (EPS) for the current financial year compared to 2008-09.

Codan (CDA)

Specialist communications and metal detection equipment maker
Codan
is wasting no time as it upgraded its profit guidance on Monday for the six months ending June 30.

This means Codan will post a record underlying net profit of around $30 million before impairment charges on record revenue of $180 million for 2009-10. These figures are about 20 per cent and 8 per cent ahead, respectively, of consensus expectations recorded on Bloomberg.

Codan had posted an underlying net profit of $12.8 million in the previous year as it booked revenue of $132.4 million.

“There is so much demand out there for their products that the issue for Codan was supply constraints – making sure they could meet demand. Previously, I assumed second half earnings would be similar to the first half just because of this supply issue," said the analyst for Foresight Securities, Todd Guyot.

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“But if you look at the announcement, they made the point that they have met the significant challenge in terms of achieving supply of products. So if you look at profit, it is actually a lot higher in the second half than in the first half."

Mr Guyot is also not worried about the rising Australian dollar even though around half of Codan’s sales are made in US dollars as he believes the company has enough pricing power to push through any increase in costs.

But it wasn’t all good news. Demand for its satellite communications equipment remains depressed even as the global economy pulls out of the downturn and this has forced management to make a non-cash writedown of $15 million on a satellite communication technology acquisition made in 1997.

Codan’s respected chief executive has also announced his retirement after 19 years on the job. Mike Heard will be replaced by Donald McGurk, who oversaw group-wide manufacturing for about nine years.

The stock jumped a further 5.5 per cent to a more than three-year high yesterday after recording a gain of 3.6 per cent on Monday.

Despite the rally in the share price, the stock is still trading on an undemanding one-year forward price-earnings multiple of less than nine times when other small cap global technology hardware companies are on an average of about 20 times.

CBD Energy (CBD

CBD Energy
is another that has recently upgraded its full-year guidance.

The supplier of solar and wind power equipment said late last week it expected to post a net profit of between $3.5 million and $4 million for the current financial year compared to its previous forecast of $2.3 million.

The uplift in expectations is largely driven by its January acquisition of solar energy firm eco-Kinetics, although management is also crediting for the upgrade ongoing strong demand for solar panels thanks to government incentives, the turnaround in its Parmac Air Conditioning and Mechanical Services that had been impacted by the slump in building activity, and robust performance of its capacitor technology division.

The renewable energy company had turned in a loss of $3.7 million in the last financial year as revenue sank 7.7 per cent to $16.9 million due largely to impairment charges and a rise in financing costs.

CBD has around $7 million in debt sitting on its balance sheet, of which more than 70 per cent is made up of convertible notes with a term of 18 months.

This means shareholders are facing about 15 per cent dilution unless these notes are redeemed.

The company also has a few interesting personalities in senior positions. Its managing director is Gerry McGowan – the founder of Impulse Airlines – and its chairman is former deputy Prime Minister, Mark Vaile.

The irony might not be lost on investors as the former Howard government, of which Mr Vaile was a leading figure, was never accused of being overly zealous on green issues.

Clean TeQ Holdings (CLQ)

Air and water purification technology firm
Clean TeQ Holdings
is also poised to report dramatic earnings growth for the current financial year.

Consensus estimates is forecasting an EPS growth of more than 600 per cent to 5¢ a share, which puts the stock on a relatively attractive P/E of around six times.

This is arguably too low for a company operating in an attractive industry as demand for environmental remediation services is expected to pick up, particularly in mining.

Clean TeQ provides resource recovery technology to improve mine productivity, via extraction of a range of valuable materials in mining, such as base and precious metals and radioactive elements.

Consensus estimates expect revenues to grow 138 per cent to $20.5 million in 2009-10 and a further 13 per cent to $23.2 million the following year.

However, the stock might not appeal to some, due to liquidity issues as its executives hold more than 56 per cent of the stock.